NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

The Company

We are a pharmaceutical company developing therapeutics for the treatment of select chronic diseases utilizing our proprietary long-term drug delivery platform, ProNeura™, and we are currently transitioning to a commercial stage enterprise having re-acquired Probuphine® in May 2018, our first product approved in the U.S. for the maintenance treatment of opioid dependence. We operate in only one business segment, the development and commercialization of pharmaceutical products.

In January 2019, pursuant to prior stockholder authorization, our Board effected a reverse split of the outstanding shares of our common stock at a ratio of one share for every six shares then outstanding (the “Reverse Split”). Pursuant to their respective terms, the number of shares underlying our outstanding options and warrants was reduced and their respective exercise prices increased by the Reverse Split ratio. The number of shares of common stock authorized and the par value of $0.001 per share did not change as a result of the Reverse Split. All share and per share amounts contained in this Form 10-Q give retroactive effect to the Reverse Split.

Basis of Presentation

 The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statement presentation. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, or any future interim periods.

The balance sheet at December 31, 2018 is derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and footnotes thereto included in the Titan Pharmaceuticals, Inc. Annual Report on Form 10-K/A for the year ended December 31, 2018, as filed with the Securities and Exchange Commission (“SEC”).

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The accompanying financial statements have been prepared assuming we will continue as a going concern.

At March 31, 2019, we had cash and cash equivalents of $5.9 million, which, we believe is sufficient to fund our planned operations through August 2019. We will require additional funds to finance our operations, including advancement of our current ProNeura development programs, beyond such period. We are exploring several financing alternatives in addition to the offering described in Note 6; however, there can be no assurance that our efforts will be successful.

 Going concern assessment

We assess going concern uncertainty in our condensed financial statements to determine if we have sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the financial statements are issued or available to be issued, which is referred to as the “look-forward period” as defined by Accounting Standard Update (“ASU”) No. 2014-15. As part of this assessment, based on conditions that are known and reasonably knowable to us, we will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and its ability to delay or curtail expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, we make certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent we deem probable those implementations can be achieved and we have the proper authority to execute them within the look-forward period in accordance with ASU No. 2014-15. 

TITAN PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS - Continued

(unaudited)

Based upon the above assessment, we concluded that, at the date of filing the financial statements in this Quarterly Report on Form 10-Q for the three months ended March 31, 2019, we did not have sufficient cash to fund our operations for the next 12 months without additional funds and, therefore, there was substantial doubt about our ability to continue as a going concern within 12 months after the date the financial statements were issued.

Use of Estimates

The preparation of these unaudited condensed financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including critical accounting policies or estimates related to warrants issued in equity financing, research and development expenses, income taxes, inventories, revenues, contingencies and litigation and share-based compensation. We base our estimates on historical experience, information received from third parties and on various market specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ significantly from those estimates under different assumptions or conditions.

Revenue Recognition

We generate revenue principally from the sale of Probuphine in the U.S., collaborative research and development arrangements, technology licenses and sales, and government grants. Consideration received for revenue arrangements with multiple components is allocated among the separate performance obligations based upon their relative estimated standalone selling price.

In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under our agreements, we perform the following steps for our revenue recognition: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) we satisfy each performance obligation.

Net Product Revenue

We recognize revenue from product sales when control of the product transfers, generally upon shipment or delivery, to our customers, which include distributors. As customary in the pharmaceutical industry, our gross product revenue is subject to a variety of deductions in the forms of variable consideration, which include rebates, chargebacks, returns and discounts, in arriving at reported net product revenue. This variable consideration is estimated using the most-likely amount method, which is the single most-likely outcome under a contract and is typically at stated contractual rates. The actual outcome of this variable consideration may materially differ from our estimates. From time to time, we will adjust our estimates of this variable consideration when trends or significant events indicate that a change in estimate is appropriate to reflect the actual experience. Additionally, we will continue to assess the estimates of our variable consideration as we continue to accumulate additional historical data. Changes in the estimates of our variable consideration could materially affect our financial statements.

Returns – Consistent with the provisions of ASC 606, we estimate returns at the inception of each transaction, based on multiple considerations, including historical sales, historical experience of actual customer returns, levels of inventory in our distribution channel, expiration dates of purchased products and significant market changes which may impact future expected returns to the extent that we would not reverse any receivables, revenues, or contract assets already recognized under the agreement.  At the end of the first quarter of 2019, we entered into an agreement with a large national specialty pharmacy with a distribution channel that is different from that of our existing customers and therefore the related reserve has specific considerations unique to it. We will continue to evaluate this specialty pharmacy’s activity during upcoming quarters and will update the related reserves accordingly.

Rebates – Our provision for rebates is estimated based on our customers’ contracted rebate programs and our historical experience of rebates paid.

Discounts –The provision is estimated based upon invoice billings, utilizing historical customer payment experience.

The following table provides a summary of activity with respect to our product returns, and discounts and rebates, which are included on our condensed consolidated balance sheets (in thousands):

TITAN PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS - Continued

(unaudited)

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. Our performance obligations include commercialization license rights, development services and services associated with the regulatory approval process.

We have optional additional items in contracts, which are accounted for as separate contracts when the customer elects such options. Arrangements that include a promise for future commercial product supply and optional research and development services at the customer’s discretion are generally considered as options. We assess if these options provide a material right to the customer and, if so, such material rights are accounted for as separate performance obligations. If we are entitled to additional payments when the customer exercises these options, any additional payments are recorded in revenue when the customer obtains control of the goods or services.

Transaction Price

We have both fixed and variable consideration. Non-refundable upfront payments are considered fixed, while milestone payments are identified as variable consideration when determining the transaction price. Funding of research and development activities is considered variable until such costs are reimbursed at which point they are considered fixed. We allocate the total transaction price to each performance obligation based on the relative estimated standalone selling prices of the promised goods or services for each performance obligation.

At the inception of each arrangement that includes milestone payments, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone is included in the transaction price. Milestone payments that are not within our control, such as approvals from regulators, are not considered probable of being achieved until those approvals are received.

For arrangements that include sales-based royalties or earn-out payments, including milestone payments based on the level of sales, and the license or purchase agreement is deemed to be the predominant item to which the royalties or earn-out payments relate, we recognizes revenue at the later of (a) when the related sales occur, or (b) when the performance obligation to which some or all of the royalty or earn-out payment has been allocated has been satisfied (or partially satisfied).

Allocation of Consideration

As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation identified in the contract. Estimated selling prices for license rights are calculated using the residual approach. For all other performance obligations, we use a cost-plus margin approach.

Timing of Recognition

Significant management judgment is required to determine the level of effort required under an arrangement and the period over which we expect to complete our performance obligations under an arrangement. We estimate the performance period or measure of progress at the inception of the arrangement and re-evaluate it each reporting period. This re-evaluation may shorten or lengthen the period over which revenue is recognized. Changes to these estimates are recorded on a cumulative catch up basis. If we cannot reasonably estimate when our performance obligations either are completed or become inconsequential, then revenue recognition is deferred until we can reasonably make such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method. Revenue is recognized for licenses or sales of functional intellectual property at the point in time the customer can use and benefit from the license. For performance obligations that are services, revenue is recognized over time proportionate to the costs that we have incurred to perform the services using the cost-to-cost input method.

TITAN PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS - Continued

(unaudited)

Research and Development Costs and Related Accrual

Research and development expenses include internal and external costs. Internal costs include salaries and employment related expenses, facility costs, administrative expenses and allocations of corporate costs. External expenses consist of costs associated with outsourced contract research organization (“CRO”) activities, sponsored research studies, product registration, patent application and prosecution, and investigator sponsored trials. We also record accruals for estimated ongoing clinical trial costs. Clinical trial costs represent costs incurred by CROs and clinical sites. These costs are recorded as a component of research and development expenses. Under our agreements, progress payments are typically made to investigators, clinical sites and CROs. We analyze the progress of the clinical trials, including levels of patient enrollment, invoices received and contracted costs when evaluating the adequacy of accrued liabilities. Significant judgments and estimates must be made and used in determining the accrued balance in any accounting period. Actual results could differ from those estimates under different assumptions. Revisions are charged to expense in the period in which the facts that give rise to the revision become known.

Leases

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update, or ASU, No. 2016-02, Leases (Topic 842), to enhance the transparency and comparability of financial reporting related to leasing arrangements. We adopted the standard effective January 1, 2019.

We determine whether the arrangement is or contains a lease at inception. Operating lease right-of-use assets and lease liabilities are recognized at the present value of the future lease payments at commencement date. The interest rate implicit in lease contracts is typically not readily determinable, and therefore, we utilize our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

Lease expense is recognized over the expected term on a straight-line basis. Operating leases are recognized on our condensed balance sheet as right-of-use assets, operating lease liabilities current and operating lease liabilities non-current. We no longer recognize deferred rent on our condensed balance sheet.

Recent Accounting Pronouncements

Accounting Standards Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Topic 842 requires most lessees to recognize right of use assets and lease liabilities, but recognize expenses in a manner similar with current accounting standards. Effective January 1, 2019, we adopted the provisions under Topic 842 using a modified retrospective transition approach without adjusting comparative periods. Additionally, as permitted by Topic 842, we elected to apply the following practical expedients: (i) not to reassess whether any expired or existing contracts are or contain leases or the classification of any expired or existing leases and (ii) not to apply the recognition requirements to short-term leases. As a result of this adoption, we recorded operating lease right-of-use asset and operating lease liability associated with our office lease located on 400 Oyster Point Blvd., South San Francisco, California, in our condensed balance sheet as of March 31, 2019. We used a discount rate of 12%, which reflects our borrowing rate as of the adoption date, to measure the present value of future lease payments to determine the fair value of our operating lease right-of-use asset and liability. Our office lease expires in June 2021 and we did not include an estimated renewal in the calculation of our operating lease right-of-use asset and liability as we believe that it is less than probable we will renew our office lease. Our adoption of Topic 842 did not result in any cumulative adjustment to the balance of our accumulated deficit as of January 1, 2019. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term, which is consistent with Topic 840.

The following table presents maturities of our operating lease:

TITAN PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS - Continued

(unaudited)

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which aligns the accounting for share-based payment awards issued to nonemployees with the guidance applicable to grants to employees. Under the new standard, equity-classified share-based payment awards issued to nonemployees are measured on the grant date, instead of the current requirement to remeasure the awards through the performance completion date. We adopted ASU 2018-07 during the three months ended March 31, 2019 using the prospective approach. The adoption of ASU 2018-07 did not have any material impact to our condensed financial statements.

In August 2018, the SEC published Release No. 33-10532, Disclosure Update and Simplification, or DUSTR, which adopted amendments to certain disclosure requirements that have become redundant, duplicative, overlapping, outdated or superseded, in light of other SEC disclosure requirements, GAAP, or changes in the information environment. While most of the DUSTR amendments eliminate updated or duplicative disclosure requirements, the final rule amends the interim financial statement requirements to include a reconciliation of changes in stockholders’ equity (deficit) in the notes or as a separate statement for each period for which a statement of comprehensive income (loss) is required to be filed. The new interim reconciliation of changes in stockholders’ equity (deficit) for the three months ended March 31, 2019 and 2018 is included herein.

Accounting Standards Not Yet Adopted

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB's disclosure framework project. The ASU is effective for us in our interim period ending March 31, 2020, with early adoption permitted. We do not expect the adoption of this ASU to have a significant impact on our quarterly or annual disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that Is a Service Contract. The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Adoption of the ASU is either retrospective or prospective. The ASU is effective for us in our interim period ending March 31, 2020, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU No. 2018-15 on our condensed financial statements.

Subsequent Events

We have evaluated events that have occurred after March 31, 2019 and through the date that our condensed financial statements are issued. See Note 6. “Subsequent Events.”

Fair Value Measurements

Financial instruments, including receivables, accounts payable and accrued liabilities are carried at cost, approximate their fair values due to the short-term nature of these instruments. Our investments in money market funds are classified within Level 1 of the fair value hierarchy. Our derivative liability is classified within level 3 of the fair value hierarchy because the fair value is calculated using significant judgment based on our own assumptions in the valuation of this liability.

At March 31, 2019 and December 31, 2018, the fair value of our investments in money market funds were approximately $5.0 million and approximately $8.9 million, respectively, which are included within our cash and cash equivalents in our condensed balance sheets.

In January 2019, our stockholders approved an amendment to the Titan Pharmaceuticals, Inc. 2015 Omnibus Equity Incentive Plan to increase the number of shares authorized for awards thereunder from 583,334 to 1,666,667.

In January 2019, our stockholders approved a repricing of 122,115 fully-vested stock options with exercise prices in excess of $21.00 held by employees and consultants other than the named executive officers or members of the Board. The effected options were repriced at $1.55. As a result of the repricing of these stock options, we incurred a total of approximately $81,000 of additional stock-based compensation expense during the three months ended March 31, 2019, of which approximately $54,000 was recorded within research and development and the remainder within selling, general and administrative in our condensed statement of operations and comprehensive loss.

TITAN PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS - Continued

(unaudited)

The following table summarizes the stock-based compensation expense recorded for awards under our stock option plans (in thousands):

We use the Black-Scholes-Merton option-pricing model with the following assumptions to estimate the fair value of our stock options:

The following table summarizes option activity:

As of March 31, 2019, there was approximately $62,000 of total unrecognized compensation expense related to non-vested stock options. This expense was expected to be recognized over a weighted-average period of approximately 3.5 years.

TITAN PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS - Continued

(unaudited)

The table below presents common shares underlying stock options, warrants and convertible loans (see Note 5) that are excluded from the calculation of the weighted average number of common shares outstanding used for the calculation of diluted net loss per common share. These are excluded from the calculation due to their anti-dilutive effect:

On March 21, 2018, we entered into a purchase agreement (“Molteni Purchase Agreement”) with L. Molteni & C. Dei Frattelli Alitti Società Di Esercizio S.P.A. (“Molteni”) pursuant to which Molteni acquired the European intellectual property related to Probuphine, including the marketing authorization application under review by the European Medicines Agency (“EMA”), and gained the exclusive right to commercialize the Probuphine product supplied by us in Europe, as well as certain countries of the Commonwealth of Independent States, the Middle East and North Africa (the “Molteni Territory”).

We received an initial payment of €2.0 million (approximately $2.4 million) for the purchased assets and will receive additional potential payments upon achievement of certain regulatory and product label milestones. Additionally, we are entitled to receive earn-out payments for up to 15 years on net sales of Probuphine in the Molteni Territory in percentages ranging from the low-teens to the mid-twenties.

We concluded that the performance obligations identified in the Molteni Purchase Agreement included the transfer of the intellectual property and our efforts towards an approval by the EMA and other regulatory bodies. The initial payment was allocated between the property transfer and our EMA efforts as set forth below. 

We used the expected cost-plus approach to estimate the standalone selling price of approximately $1.4 million related to our efforts towards an approval by the EMA and other regulatory bodies (“Titan Services”). This includes employee related expenses as well as other manufacturing, regulatory and clinical costs, which are incurred as part of our efforts. As of March 31, 2019, we fully recognized the revenue associated with the Titan Services under the Molteni Purchase Agreement as we completed the Titan Services.

The following table presents changes in contract assets and liabilities during the three months ended March 31, 2019:

In August 2018, we entered into an amendment (the “Amendment”) to the Molteni Purchase Agreement. Under the Amendment, Molteni made an immediate payment of €950,000 (approximately $1.1 million) to us and a convertible loan of €550,000 (approximately $0.6 million) (“Molteni Convertible Loan”) (see Note 5), both in exchange for the elimination of an aggregate of €2.0 million (approximately $2.3 million) of regulatory milestones provided for in the Molteni Purchase Agreement that are potentially payable in 2019, at the earliest. We concluded that the approximately $1.1 million immediate payment by Molteni reflected a milestone payment with no additional obligations to us and, therefore, was recognized as revenue during the year ended December 31, 2018.

TITAN PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS - Continued

(unaudited)

Horizon and Molteni Loan

In July 2017, we entered into a venture loan and security agreement, which was subsequently amended in February 2018, (“Horizon Loan Agreement”) with Horizon Technology Finance Corporation (“Horizon”).

Repayment of the loans is on an interest-only basis through December 31, 2019, followed by monthly payments of principal and accrued interest for the balance of the 46-month term. The loans bear interest at a floating coupon rate of one-month LIBOR (floor of 1.10%) plus 8.40%. A final payment equal to 5.0% of each loan tranche will be due on the scheduled maturity date for such loan. In addition, if we repay all or a portion of the loan prior to the applicable maturity date, we will pay Horizon a prepayment penalty fee, based on a percentage of the then outstanding principal balance, equal to 4% if the prepayment occurs during the interest-only payment period, 3% if the prepayment occurs during the 12 months following such period, and 2% thereafter.

In connection with the Horizon Loan Agreement, we issued warrants to purchase an aggregate of 366,668 shares of our common stock with an exercise price per share of $1.50 associated with the Horizon Loan Agreement to Horizon.

In March 2018, we entered into an Amended and Restated Venture Loan and Security Agreement (the “Restated Loan Agreement”) with Horizon and Molteni pursuant to which Horizon assigned approximately $2.4 million of the $4.0 million outstanding principal balance of the loan to Molteni and Molteni was appointed as the collateral agent and assumed majority and administrative control of the loan. Under the Restated Loan Agreement, Molteni has the right to convert its portion of the debt into shares of our common stock at a conversion price of $7.20 per share and is required to effect this conversion of debt to equity if we complete an equity financing resulting in gross proceeds of at least $10.0 million at a price per share of common stock in excess of $7.20 and repay the $1.6 million balance of Horizon’s loan amount. In connection with the Restated Loan Agreement, we issued warrants to purchase an aggregate of 6,667 shares of our common stock with an exercise price per share of $7.20 associated with the Restated Loan Agreement to Horizon. As of March 31, 2019, loan from Molteni was convertible into 333,333 shares of our common stock under the Restated Loan Agreement.

As of March 31, 2019, the outstanding loan under the Restated Loan Agreement was approximately $3.9 million, net of debt discount of $0.1 million, of which approximately $0.7 million was recorded within current portion of long-term debt and the remainder within long-term debt in our condensed balance sheet.

In consideration of Molteni’s entry into the Restated Loan Agreement and the Purchase Agreement, on March 21, 2018, we entered into a rights agreement (the “Rights Agreement”) with Molteni pursuant to which we agreed to (i) issue Molteni seven-year warrants to purchase 90,000 shares of our common stock at an exercise price of $7.20 per share (the “Molteni Warrants”), (ii) provide Molteni customary demand and piggy-back registration rights with respect to the shares of common stock issuable upon conversion of its loan and exercise of the Molteni Warrants, (iii) designate one member of our board of directors following conversion of the loan in full and (iv) provide board observer rights to Molteni if it has not designated a board nominee as well as certain information rights.

Molteni Convertible Loan

In connection with the Amendment to the Molteni Purchase Agreement (see Note 4), the Molteni Convertible Loan will convert automatically into shares of our common stock upon the issuance of marketing approval for Probuphine by the EMA at a conversion price per share equal to the lower of (i) the closing price on the loan funding date ($3.42 per share) or (ii) the closing price on the conversion date. In the event the EMA has not granted marketing approval by December 31, 2019, the Molteni Convertible Loan will become due and payable, together with accrued interest at the rate of one-month LIBOR (to the extent in excess of 1.10%) plus 9.50% per annum. Based on the closing stock price of our common stock at March 31, 2019, the Molteni Convertible Loan, including the unpaid accrued interest, was convertible into 374,456 shares of our common stock as of March 31, 2019.

As of March 31, 2019, the outstanding Molteni Convertible Loan was approximately $0.5 million, net of debt discount of approximately $0.1 million, which was recorded within current portion of long-term debt in our condensed balance sheet.

In April 2019, we entered into an at-the-market sales agreement with A.G.P./Alliance Global Partners (A.G.P.) and filed a prospectus supplement for the sale of up to $8.6 million of our common stock at market price (the “ATM”).

In April 2019, we received net proceeds of approximately $0.1 million from the exercises of warrants to purchase an aggregate of 70,000 shares of our common stock at $1.50 per share.